3 1/2 hour CPE course regarding Sec 42 and Sec 47 Tax Credits, prepared for the Houston Chapter of Tax Executives Institute May 2013 Tax School.

1. IRC Section 42:
Low Income Housing Tax
Credits & Historic Credits
Presented by: Kutak Rock &
Midwest Housing Equity Group

2. Presenters
Andrea Frymire
Executive Vice President
Midwest Housing Equity Group
Gregg Yeutter
Partner In Charge
Kutak Rock LLP
Jill Goldstein
Partner
Kutak Rock LLP

3. IRC Section 42
Andrea Frymire
Executive Vice President
Midwest Housing Equity Group
AFrymire@mheginc.com

4. Tax Credit Syndicator – Midwest Housing
 Non-profit organization established in 1993 at the
request of Nebraska Governor Ben Nelson because
rural areas underserved
 Mission: Change lives for a better tomorrow by
promoting the development and sustainability of
quality affordable housing
 Service area today includes Arkansas, Colorado, Iowa,
Kansas Minnesota, Missouri Nebraska, Oklahoma, South
Dakota and Texas

5. Background
 The Tax Reform Act of 1986 signed by President
Reagan
 Curbed tax shelters and introduced Section 42
 Pre-1986 multifamily housing developments sold primarily to
individual investors
 Post-1986 Section 42 multifamily housing developments sold to
corporate investors
 The Omnibus Budget Reconciliation Act of 1993 signed
by President Clinton – made the LIHTC permanent
 From 1987 through August 1993, the LIHTC program was subject
to various sunsets
 Carryback 1 year
 Carry forward 20 years

6. Purchaser Profile
 Corporate Accredited Investor
 Accredited as per Regulation D of the Securities & Exchange Act
 $5,000,000+ in assets (varies by syndication firm, many much higher)
 Can withstand losses due to depreciation or even loss of
investment
 Usually a C Corporation
 Has to forecast a taxable need for credits
 Must utilize the credits themselves
 SEC issues when buy credits to resell
 Many Banks for CRA purposes
 Insurance Companies for both economic and social
responsibility
 No set standard for an exact profile other than paying
taxes

7. Why Do Investors Invest
 Optimal Tax Planning Strategy
 10 full years of federal tax credits
 15 full years of depreciation and other passive
deductions
 Periodic Write-down of Paid in Capital
 CRA Investment Credit, if applicable
 Marketing and PR opportunities
 Stabilizing and Investing in your local communities
 Stable proven track record of a performing asset class
 Accurately forecasted tax benefits
 Quarterly Reporting and Asset Management update

8.  Tax Planning Strategy
 Keep your tax dollars out of Washington
 You know where they are going and how being used
 You have a say in those dollars usage
 You generate a decent return versus a 0% (or cost) with sending to
Washington
 Spread the credits over 10 years
 The Warren Buffet Rule
 What other program can you do something for society and
have society give you something in return
Why Do Investors Invest (cont.)

9. Tax Credit Calculation
$1,000,000 Total Project Cost
$ 200,000 Project Cost Not Eligible for Credits
$ 800,000 Eligible Basis for Credits*
x 9% Tax Credit Percentage
$ 72,000 Credits Received/year
x 10 Years credits are received
$ 720,000 Credits received
x .85 Price paid for credits
$ 612,000 Equity into project from MHEG
Allows for low debt on project enabling
developers to keep rents Affordable
* States may allow 130% basis boost (not shown here).

10. Example Benefit Schedule

11. Points to Consider
 MHEG does not want the capital you need for normal
operations.
The dollars you are considering placing with MHEG are actually
dollars you owe to the IRS as a result of your successful operations.
You receive no monetary return with your payment to the IRS.
You will receive an above market return and a CRA Investment
Credit, if applicable, when you purchase tax credits with MHEG.
Your participation benefits the community and you receive a
monetary return without jeopardizing your normal business capital.

12. Status of LIHTC Market in 2013
Gregg S. Yeutter, Esq.
Partner
Kutak Rock LLP
Greg.Yeutter@KutakRock.com

13. Atlanta
Chicago
Denver
Fayetteville
Irvine
Kansas City
Little Rock
Los Angeles
Minneapolis
Oklahoma City
Omaha
Philadelphia
Richmond
Scottsdale
Washington, D.C.
Wichita
Kutak Rock LLP – 16 Offices, 450 Attorneys

14. Tucson
Fyffe
Los Angeles
Woodland Hills
Denver
Honolulu
Des Moines Chicago
Topeka
Louisville
Minneapolis
Kansas City
St. Louis
Omaha
Baltimore
Billings
Charlotte
New York
Cleveland
Oklahoma City
Portland
Pittsburgh
Fairfax
McLean
Location of Kutak Rock’s Tax Credit Clients

15. 2013 LIHTC Allocation
Total Credits Allocated by States 700,000,000
Multiplied by Credit Period 10 Years
Total 2013 Allocation $7,000,000,000
4% Bond Transactions $1,500,000,000
Secondary Market $500,000,000
Estimated Total Credits in 2013 Market $9,000,000,000
Estimated Credit Price $0.85
Estimated Equity Needs in 2013 $7,650,000,000
2013 LIHTC Market (Supply Slide)

18. Survey Total
Stabilized
Properties
% Stabilized
Number of
Properties
16,356 14,700 89.9%
Number of
Units
1,191,198 1,049,723 88.1%
Housing Credit
Net Equity
59,949,803,149 49,704,360,906 82.9%
Total Housing
Credits
69,112,707,921 56,811,046,194 82.2%
Overall Portfolio Composition

19. 2008 2009 2010
Median Physical
Occupancy
96.4% 96.3% 96.6%
Median Hard
Debt Coverage
Ratio
1.15 1.19 1.24
Median Per Unit
Cash Flow
$246 $335 $412
Median Physical
Occupancy
96.4% 96.3% 96.6%
Overall Portfolio Performance (2008-2010)

20. Median Debt Coverage Ratio (2008-2010)

21. Median Physical
Occupancy
Median Debt
Coverage Ratio
Median Per Unit
Cash Flow
Credit
Type
2008 2009 2010 2008 2009 2010 2008 2009 2010
4% Tax
Credits
96.4% 96.3% 96.6% 1.15 1.19 1.23 $350 $432 $530
9% Tax
Credits
96.5% 96.4% 96.6% 1.15 1.19 1.24 $215 $322 $387
Overall 96.4% 96.3% 96.6% 1.15 1.19 1.24 $246 $335 $412
Operating Performance by Credit Type

22. Median Physical
Occupancy
Median Debt
Coverage Ratio
Median Per Unit
Cash Flow
Development
Type
2008 2009 2010 2008 2009 2010 2008 2009 2010
Historic
Rehab
95.0% 94.7% 95.4% 1.05 1.14 1.16 $5 $129 $121
New
Construction
96.7% 96.5% 96.8% 1.16 1.19 1.23 $273 $332 $414
Rehab 96.0% 96.3% 96.4% 1.15 1.21 1.21 $227 $368 $442
Mixed 96.0% 95.6% 96.1% 0.88 1.05 1.05
$(114
)
$208 $290
Overall 93.4% 96.3% 96.6% 1.15 1.19 1.19 $246 $335 $412
OperatingPerformancebyDevelopmentType

23. Median Physical
Occupancy
Median Debt
Coverage Ratio
Median Per Unit
Cash Flow
Tenancy
Type
2008 2009 2010 2008 2009 2010 2008 2009 2010
Family 96.0% 95.9% 96.0% 1.13 1.16 1.21 $217 $303 $385
Senior 97.8% 97.5% 97.5% 1.20 1.26 1.30 $317 $417 $466
Special
Needs
97.0% 97.0% 97.0% 1.29 1.34 1.42 $384 $505 $548
Other 96.1% 96.5% 96.8% 1.19 1.23 1.22 $102 $249 $298
Overall 96.4% 96.3% 96.6% 1.15 1.19 1.24 $246 $335 $412
Operating Performance by Tenancy Type

24.  Federal Government
 Allocates credits to states, IRS oversees compliance
 State Housing Agency
 Allocates credits to projects meeting its QAP priorities
 Does Financial Feasibility analysis
 Developer/GP
 Puts all of the pieces of the project together
 Manages the owner/provides many guarantees
 Lender(s)
 Provide construction and/or permanent financing
 Underwrite project economics
Key Participants in LIHTC Transactions

25.  Tax Credit Investor/LP
 Provide equity
 Underwrite project economics
 Monitor ongoing performance
 Property Management Company
 Leasing of project units in compliance with Code
Section 42
 Accountants/Attorneys
 Prepare financial projections
 Prepare annual audited project financial statements
 Issue tax opinions
Key Participants in LIHTC Transactions (Cont’d)

26. National Champion
$1.5T
5 Year Cost
(JCT Estimates)
Home Mortgage Interest Ded. $573B
LIHTC $30B
Renewable Energy Credits $10B
HTC $3.6B
NMTC $3.5B
Source: Congressional Budget Office
Federal Deficits by Year

27. Three Ways to Invest
 Fund Investment
 Offer Diversity
 Multiple investors
 Multiple projects
 Fund General Partner has
financial risk
 Fund level of reserves
 Less concerns over FIN 46,
consolidation issues
 Less need for tax credit
expertise by the investor
 Direct Investment
 No diversity-all eggs in one
basket
 Do get specific project in
investors area
 More of a say in investment
terms
 Direct (cont.)
 Less reserves and no financial
backing from Fund
 General Partner Sole investor-FIN
46 comes into play
 May need staff expertise
 Proprietary Fund Investment
 Some diversity, usually fewer
projects
 Usually specifies where projects
must be located
 Usually dictates deal terms
 Less chance of Fund General
Partner taking financial risk
 Most likely FIN 46 comes into play
 Usually has tax credit staff
expertise

28. Fund Investment Structure
Midwest Housing
Tax Credit Syndicator
MHEG FUND 40, L.P.
Owned 99.99% by Investors
Owned 00.01% by Midwest Housing
Investors
State HFA
Tax Credits
Project A
Lower Tier Partnership LP/LLC
Owned .01% by Developer/GP
Owned 99.99% by Fund

29. What is the Real Risk?
Ownership risks of multifamily low-income rental housing
pools
 Mitigated by MHEG’s investment policies, ongoing management
and financial oversight, as well as MHEG’s financial strength
Compliance risk
 Mitigated by MHEG’s continuing compliance practices and
oversight
Changes in current law
 Highly improbable any law change would affect any current
investments
Reputation Risk
 We take “the high road”, we know that we represent our fund
participants who are financial pillars of their communities

30. What to Expect in the Future
 At the end of the 15-year tax credit compliance period,
our goal is to exit the partnership in a manner that allows
the property to continue to comply with the states
extended compliance period.
 The general partner or managing member in most
cases has a right of first refusal to purchase our interest for
an amount stipulated in the IRS code.
 Since the project still has restricted rents, it will not be
able to refinance much additional debt. Our exit usually
does not generate significant cash or create a tax
event. Therefore, we do not include any residual value
in our analysis of return to investors.
(note: this narrative is greatly oversimplified, but does represent the results of a typical exit)

31. Historical Tax Credits: Overview & Recent Topics
Jill Goldstein, Esq.
Partner
Kutak Rock LLP
Jill.Goldstein@KutakRock.com

32. General Partner Investor
Property
Developer
99.99%
0.01% — Interest, Management Fee, etc.
Development Fee
Fee Ownership
LeaseLease
Owner, L.P.
End User End User
HTC Only: Traditional Single Entity Structure

33. First Mortgage Debt
Special Limited
Partner
0.05%
AHAP
Loan
Debt
$2,412,000
$1,818,182
Equity
$6,262,968
Owner
TBD Loss
Partner
99.99%
Federal LIHTC
& HTC Partner
99.98%
General Partner
0.05%
State LIHTC
Partner
0.01%
0.01%
Debt
Repayment
Equity
$3,150,000
Equity
$4,962,968 Grant
$1,300,000
Equity
$100
(Missouri)
Single Tier LIHTC/HTC Combo Entity Structure

34. Acquisition $155,000
Exterior demolition 47,400
Rehab of existing building 8,450,000
Enlargement 200,000
Furniture, fixtures, etc. 47,600
Other costs 100,000
TOTAL COSTS $9,000,000
$8.45 M
$47.6 K
$47.4 K
Qualified Rehabilitation Expenditures (QREs)

35. Qualified Rehabilitation Expenditures $ 8,450,000
Tax Credit % x 20%
Tax Credits $ 1,690,000
Investor % x 99.99%
Price Per Credit x 0.90
Equity $ 1,520,848
2012
Tax Return
$1.69 M
$9M
$1.52M
Total Costs
Equity
17%
Qualified Rehabilitation Expenditures (QREs)

36. The Investor is the L.P. in the Project Partnership
Historic Tax Credit $100,000
Syndication Proceeds ($.90/Credit) $90,000
Residential Value $0
GAAP Treatment
Historic Tax Credit Tax Benefit $100,000
Deferred Tax Liability (35%)
- Resulting from the basis adjustment under
IRC Section 50(c) (Old IRC Section 48(q))
$(35,000)
Net GAAP Benefit from the HTC $65,000
Book Loss on Investment (Residual Value $0) ($90,000)
Less: Tax Benefit on Book Loss (35%) $31,500 ($58,500)
TOTAL GAAP Benefit $6,500
RETURN ON INVESTMENT 7.22%
Traditional Example

37. The Investor is the L.P. in the Master Tenant
Historic Tax Credit $100,000
Syndication Proceeds ($.90/Credit) $90,000
Residential Value $0
GAAP Treatment
Historic Tax Credit Tax Benefit $100,000
Deferred Tax Liability (35%)
- Resulting from the basis adjustment under
Treasury Regulation 1.48-4 in lieu of a basis adjustment)
$(35,000)
Deferred Tax Benefit (35%)
- Resulting from the increase in basis in the L.P.’s partnership
interest due to recognizing income under the basis
adjustment rule above (Treas. Reg. 1.48-4)
$35,000
Net GAAP Benefit from the HTC $100,000
Book Loss on Investment (Residual Value $0) ($90,000)
Less: Tax Benefit on Book Loss (35%) $31,500 ($58,500)
TOTAL GAAP Benefit $41,500
RETURN ON INVESTMENT 46.11%
Alternate Example

38. Exhibit III-B
Run 3.6
Page 5
9.57%
(single-tier)
Calculation of Rates of Return on Investment
In Low-Income, Federal Historic & AHAP Contribution

39. General Partner
0.01% Ownership
0.01% Losses/LIHTC
Lessor L.P.
(LIHTC)
99.98% LIHTC
HRTC Equity
Subleases
Sec. 42
Income
Restrictions
General Partner
0.01% Ownership
0.01% Profits/HRTC
Tenant L.P.
(HRTC)
10.00% Ownership
0.01% Losses/LIHTC
Rent
Lease
Sec.48(d) HRTC Pass-Through
Sec. 42 Income Restrictions
LIHTC Limited Partner
89.99% Ownership
99.98% Losses/LIHTC
Low Income
Tenants
HRTC Limited Partner
99.99% Ownership
99.99% Profits/HRTC
LIHTC
Equity
Rental
Incom
e
HRTC Equity
99.99%
HRTC
HRTC/LIHTC Combination
MasterLease/Credit Pass-Through

40. General Partner
0.01% Ownership
0.01% Losses/LIHTC
Lessor L.P.
(LIHTC)
99.98% LIHTC
HRTC Equity
Subleases
Sec. 42
Income
Restrictions
General Partner
0.01% Ownership
0.01% Profits/HRTC
Tenant L.P.
(HRTC)
10.00% Ownership
0.01% Losses/LIHTC
Rent
Lease
Sec.48(d) HRTC Pass-Through
Sec. 42 Income Restrictions
LIHTC
Limited Partner
89.98% Ownership
99.98% Losses/LIHTC
Low Income
Tenants
HRTC Limited Partner
99.99% Ownership
99.99% Profits/HRTC
LIHTC Equity
Rental
Income
HRTC Equity
99.99%
HRTC
State LIHTC
L.L.C.
0.01% Ownership
0.01% Losses/LIHTC
100% State LIHTC
100% State
LIHTC
State LIHTC
Equity
NOTE: State LIHTC Investor
likely will have a true 1%
interest in light of recent IRS
challenges.
HRTC/LIHTC Combination
MasterLease/Credit Pass-Through (w/StateLIHTC)

41. Exhibit VIII-MT
Run 4.4
Page 49
25.55%
CalculationofRatesof Returnto Limited Partner on
InvestmentinFederalLow-Income,FederalHistoricTaxCredits

42. Qualified Rehabilitation
Expenditures
$ 8,450,000
Tax Credit % x 20%
Tax Credits $ 1,690,000
Investor % x 99.99%
Price Per Credit x 0.90
Equity $ 1,520,848
2012
Tax Return
$1.69 M
2012
Placed in Service
100%
5 Year Recapture Period
2013 2014 2015 2016 2017
80% 60% 40% 20% 0%
HTC Recapture

43.  Recapture of the credit occurs if, within five years of
placing in service:
 ownership of the property changes
 the property ceases to be investment credit property,
 sale of a partnership interest, or
 reduction of a partner’s interest to less 2/3 of original ownership
interest
 The recapture amount is equal to 100 percent of the
credit claimed and used to reduce tax if the
recapture event occurs before the first anniversary of
the placed in service date, and is reduced by 20
percent for each subsequent year.
HTC Recapture

44. State
Estimated Tax Credit
Available in 2013
Bifurcated from
Federal LIHTC?
Credit Period Type of Credits
Arkansas Not Available Not Available Not Available Not Available
California TBD TBD TBD TBD
Connecticut $10,000,000 Yes 1 Year Other
Georgia $15,791,000 Yes 10 Years 9 Percent
Hawaii Not Available Not Available Not Available Not Available
Illinois Not Available Not Available Not Available Not Available
Massachusetts $10,000,000 Yes 5 Years Other
Missouri $13,489,545 Yes 10 Years 9 Percent
New Mexico Not Available Not Available Not Available Not Available
New York Not Available Not Available Not Available Not Available
North Carolina
Contact NCHFA
for information
N/A N/A Other
Puerto Rico $20,000,000 Yes 1-10 Years Other
Utah Not Available Not Available Not Available Not Available
Vermont Not Available Not Available Not Available Not Available
“TBD” - indicates this figure or date is still to be determined by the according state agency.
“Not Available” - indicates that the state agency was unable to respond to our inquiries by the time this book went to print.
State LIHTCs

45.  Arkansas
 Colorado
 Connecticut
 Delaware
 Georgia
 Indiana
 Iowa
 Kansas
 Kentucky
 Louisiana
 Maine
 Maryland
 Massachusetts
 Michigan
 Minnesota
 Mississippi
 Missouri
 Montana
 New Mexico
 New York
 North Carolina
 North Dakota
 Ohio
 Oklahoma
 South Carolina
 Utah
 Vermont
 Virginia
 West Virginia
 Wisconsin
States with Historic Tax Credits

46. Los Angeles
Irvine
Scottsdale
Denver
Omaha
Wichita
Oklahoma City
Kansas City
Minneapolis
Chicago
Atlanta
Richmond
Washington, D.C.
Philadelphia
Fayetteville
Little Rock
States with Historic Tax Credits

47.  In fiscal year 2010, states with their own historic tax
credit programs occupied eight of the top 10 ranking
for number of completed historic tax credit
rehabilitation projects.
Rank State # of Completed Projects
1 Missouri 118
1 Virginia 118
3 Massachusetts 63
5 North Carolina 44
6 Louisiana 43
7 Ohio 32
8 Kentucky 27
9 New York 24
10 Mississippi 23
State Historic Tax Credits Success

48.  State Historic Tax Credits
 Virginia Historic Tax Credit Fund 2001 LP v. IRS, 4th Circuit
 Court held that a transaction was a disguised sale of property
interests.
Recent Legal Challenges to Historic Tax Credits

49.  Federal Historic Tax Credits
 Historic Boardwalk Hall, LLC v. IRS, 3rd Circuit
 Court held investor was not a bona fide partner in the
partnership and was not entitled to HTCs.
 Consolidated Edison Company of NY v. U.S.
 ―Reasonable likelihood‖ of put exercise = sham transaction
 IRS Chief Counsel Memo
 Applied Boardwalk analysis to ―traditional‖ HTC transaction to
disallow credits to an HTC investor.
Recent Legal Challenges to Historic Tax Credits

50.  Significant structuring uncertainty
 Major HTC investors are sitting on sidelines
 Other investors slowing/reducing involvement
 Historic Tax Credit Coalition (KR is a member)
 Met with IRS
 Sent letter to U.S. Treasury, members of Congress
 Prepared Amicus Brief to 4th Circuit re: Virginia Historic Tax
Funds
Industry Reaction

51. Questions?